Unincorporated Business Entities Law

Earlier, I noted the decision in In re Ravitz v. Gerard Furst and Marjorie Ravitz, DPM, P.C., 2009 NY Slip Op 06437 (N.Y. App. Div. Sept. 8, 2009), in which one shareholder of a professional corporation sought to have the court determine the value of the corporation’s two offices, and to take that into account in distributing the assets of the corporation in the course of liquidation.   Part of the rationale for refusing the relief sought was the Court’s two-sentence conclusion that goodwill can only be an asset of the corporation when the shareholders so agree.  Slip Op., at 2.  The basis for that holding can only be gleaned from a four-case string cite.

The primary authority is Dawson v. White & Case,88 N.Y.2d 666, 672 N.E.2d 589 (1996), which does not stand for that propostion.  In Dawson v. White & Case, an expelled partner of a law partnership sought to have goodwill included in determining the value of his interest in the partnership.  The basis for the court’s holding was that the partners had, by express agreement, ande by prior practice, excluded goodwill as an asset of the partnership:

[N]ew White & Case partners never paid anything for goodwill; departing partners never received a payment for goodwill; and goodwill was not listed as an asset in the firm’s financial statements. * * * The White & Case partnership agreement contained the following provisions:

“It is expressly understood and agreed that no consideration has been or is to be paid for the Firm name or any good will of the partnership, as such items are deemed to be of no value” (art fourth [c]);

and

“The computation of the amount with which a Former Partner shall be charged or credited … shall exclude any value for the good will of the partnership or the Firm name, as such items are deemed to be of no value” (art sixth [d]).

 88 N.Y. 2d at 672.  The court expressly limited its holding:

We note that the holding in this case is based on the specific facts presented, and should not be construed as a prohibition against the valuation, in the appropriate case, of law firm goodwill. In addition, the existence of law firm goodwill has been recognized in conjunction with the recent promulgation of Code of Professional Responsibility DR 2-111 (A), which authorizes the sale of “a law practice, including good will,” by a “lawyer retiring from a private practice of law, [or] a law firm one or more members of which are retiring from the private practice of law with the firm.”

 To the extent that dictum in [an earlier case] stands for the proposition that a professional business, as a matter of law, cannot have any goodwill apart from the goodwill of its constituent members, we note that this rationale has been rejected by this Court in a different context (see, Spaulding v Benenati, 57 NY2d 418, 422-424, [enforcing sale of dentistry practice goodwill]…) and has been superseded by the economic realities of the contemporary practice of law, illustrated by attorney advertising, internationalization of law firms, and other professional developments. In short, the ethical constraints against the sale of a law practice’s goodwill by a practicing attorney no longer warrant a blanket prohibition against the valuation of law firm goodwill when those ethical concerns are absent.

Id. at 672-73 (citations omitted) (emphasis added).

In Kaplan v Shachter & Co., 261 A.D.2d 440, 690 N.Y.S.2d 91 (1999), the Court did begin by noting the lack of an express agreement to make goodwill a partnership assets, but also noted facts supporting the trial court’s determination that good will was not a partnership asset:

Here, the partnership agreement did not specify that goodwill was a firm asset.  Furthermore, insofar as no consideration was paid for goodwill on the admission of partners, no amounts had been paid or given on account of goodwill, and the firm’s financial statements did not reflect any goodwill, it is clear that the partners did not otherwise view goodwill as a firm asset.

261 A.D.2d at 440.  In Saltzstein v Payne, Wood & Littlejohn, 292 A.D.2d 585, 740 N.Y.S.2d 95 (2002), the Court perfunctorily parroted the language in Kaplan.  

The third Appellate Division case cited by the In re Ravitz Court, In re Leslie & Penny for Penny Preville, 303 A.D.2d 508, 757 N.Y.S.2d 302 (2003) stands for  the opposite proposition than the conclusion in In re Ravitz.  Penny Preville, Inc. engaged in the business of designing jewelry.  Its initial shareholders were Penny Siskin (formerly Penny Preville).  When a second shareholder was brought into the business, the parties entered into a Shareholder Agreement providing that, on dissolution of the corporation, the Siskins would have the exclusive right to the use of the trade name ‘Penny Preville.”  303 A.D.2d at 508-09.  The Court rejected the claim by the Siskins that the Shareholder Agreement excluded the good will of the corporation, especially that asscoiated with the trade name, from ownership by the corporation:

 We agree with the Supreme Court that this clause only gives the Siskins the exclusive right to use the trade name “Penny Preville” upon dissolution. The Agreement does not explicitly give the Siskins the right to the value of the Corporation’s goodwill associated with the trade name “Penny Preville,” nor does it except such goodwill or the trade name from the Corporation’s assets distributable upon dissolution. * * *

In adjudicating the rights of the parties under the Agreement, this Court may not read any additional provisions into that agreement. The Court, therefore, cannot accept the Siskins’ invitation to read into the Agreement an additional provision giving them continued ownership of the trade name or of its associated goodwill. Thus, the Siskins are entitled only to the exclusive rights of continued use of the name “Penny Preville” upon dissolution,but the value of the Corporation’s goodwill, including that associated with the trade name “Penny Preville,” … should be distributed along with its other assets upon dissolution.

Id. at 509 (emphasis added).  While the action for judicial dissolution in that case was under Section 1104-a of the NY GCL (oppression), rather than under Section 1104 (deadlock), Section 1117, which incorporates Section 1005 (relied on in In re Ravitz), applies to all judicial dissolutions.

As noted by Peter A. Mahler (New York Business Divorce blog), most written agreements among professionals engaged in a joint practice expressly address the treatment of professional goodwill.  Or at least, well-drafted agreements do.

Gary Rosin